Despite FG’s Promise, Airline Operators Insist Existing Tariffs Erode Profitability

Chinedu Eze

While the controversy over the new tax laws rages, the aviation industry has raised issues with the new tax regime, insisting that it will erode profitability and adversely affect domestic air travel.

But the Presidential Fiscal Policy and Tax Reforms Committee has dismissed claims that Nigeria’s new tax laws will hurt the aviation industry, insisting that the reforms are designed to reduce operating costs for airlines and bring long-term relief to the sector.

The committee acknowledged the long-standing challenges facing the aviation industry, particularly the burden of multiple taxes, levies and regulatory charges, but noted that government has been engaging extensively with airline operators and other stakeholders, adding that the consultations are ongoing.

According to the Committee, the new tax regime addresses several structural issues that have historically driven up costs for airlines and constrained cash flow.

One of the most significant changes is the removal of the 10 per cent withholding tax on aircraft leases under the existing law. The committee explained that the tax, which had been the single biggest tax burden on airlines, has now been replaced with a rate to be determined by regulation. This, it said, creates room for either a full exemption or a substantially lower rate.

But airline operators have insisted that what the federal government promised would ease the operators in the application of the new tax regime would even exacerbate their case because currently the airlines are literally flogged by numerous taxes with different names, which the new tax regime may not likely remove; except if government had chosen to revive the airlines.

This, they said, would mean total review of the existing taxes, suspension of many of them and introduction of the new tax regime with the precondition that government would want the airlines to survive and become profitable.

Industry stakeholder and a trustee member of Airline Operators of Nigeria (AON), Captain Roland Iyayi, told THISDAY in exclusive interview that the existing taxes with planned introduction of new ones may end up killing the airlines; “unless there is a careful review, recognising the regulation of taxes by the International Civil Aviation Organisation (ICAO) on the standardised taxes paid by member countries and other taxes which the Nigerian government and its agencies level on airlines.”

Iyayi brought to the fore the fuel surcharge paid by the airlines, disclosing that the Federal Airports Authority of Nigeria (FAAN) charges N2.50k per litre of aviation fuel bought by domestic airlines, which he said is a huge financial burden on the operators, “but on the ticket, fuel surcharge is based on the average load factor, which does not really reflect the N2.50 per litre the operators pay.”

He noted that because of the importance of aviation fuel to the airlines they are double taxed by FAAN and the Nigeria Civil Aviation Authority (NCAA), which collects 5% ticket sales charge on the base fare. Those who justify the charges insist that it is passengers that pay for the charges but Iyayi explained that passenger demand for flight is elastic in the sense that when these taxes and charges pile up on the ticket it would become a disincentive to many potential passengers, observing that increase in fare by one dollar could supress demand for tickets.

Iyayi said that airline losses could lead to their liquidation adding that there is no indication of the airlines enjoying any kind of subsidy from government; “So, whatever losses is borne by the airlines, insisting that airlines will fly empty eventually if there is no review of the 17 taxes they pay.”

He also said that many Nigerians knowledgeable about the aviation industry argue that it is not taxes that airlines pay but charges.

He explained that airlines pay taxes because what they pay are put in the coffers of government, “instead of using them to rehabilitate the airports, acquire equipment, including navigational equipment, but they pay the monies to the federal government, stating that ICAO said aviation agencies revenue is on cost recovery basis; not profitability.”

“We are saying that on every flight we pay 17 taxes. They can be called any name but they are tax because when you pay money for landing and government use it to development other sectors of the economy and not to fix runway, for example, it is tax. According to ICAO regulation, money earned from aviation should be used to develop aviation and what the agencies like FAAN earn is called cost recovery because money earned from airlines should be used to develop aviation infrastructure. The passenger service charge that passengers pay is for the services that FAAN provides for the passengers like movement of passengers in a vehicle to the foot of the aircraft at the tarmac, but more often it is airlines that use their vehicles to provide that service but FAAN still collect the passenger service charge. But airlines pay for every service rendered to them whether by FAAN, the Nigerian Airspace Management Agency, NCAA,” he said.

Iyayi recalled that 5% charge was introduced at NCAA when Dr Harold Demuren who later became the Director General, was a Director at the agency. “The money was initially meant for the maintenance of 12 airports that was built at that time. At that time, the now defunct Nigeria Airways Limited (NAL) as national carrier was exempted from that ticket sales charge (TSC). it was paid by foreign airlines. that TSC has lasted for 35 years. Globally, the maximum tax charges airlines pay is 2.5 per cent but it is five per cent in Nigeria and now they want to introduce 7.5 per cent value added tax (VAT).

“Invariably, what it means is that airline cannot defray operational cost. That the people are able to fly is a function of disposable income. There is need to review these taxes because this is not one airline’s problem; it is domestic airlines problem,” he said.

Iyayi also recalled that it was because government knew that such taxes could kill airlines that the former Minister of Aviation, Hadi Sirika when establishing the still-born Nigeria Air exempted it from paying taxes for 25 years, noting that Ethiopian Airlines, which midwifed Nigeria Air insisted that if government wanted the airline to survive it must be given tax holiday for 25 years.

This explained why NCAA in 2023 remitted $500 million to the Single Treasury Account (TSA) as its mandatory 25% remittance to government.

“That means that NCAA was awash with money. What infrastructure is NCAA providing? Its function is to train personnel and how many supervisors are trained regularly? These monies are not used to develop the industry; yet the airlines are overburdened with taxes. Even the N2.50 fuel surcharge that domestic airlines pay, international airlines do not pay because that is illegal, according to ICAO regulations,” he said.

However, the Presidential Fiscal Policy and Tax Reforms Committee said it would save the airlines from withholding tax on aircraft lease. On Value Added Tax, the committee said the ongoing reforms would move the industry from what it described as “hidden costs” to full VAT neutrality, remarking that while airlines benefitted from a temporary VAT suspension introduced in 2020 after COVID-19, the committee said the policy prevented them from recovering input VAT on non-exempt items, leading to VAT being embedded in operating costs.

In other words, airlines will pay 7.5 per cent VAT; unless if reviewed.